Austerity in Portugal

More pain, less gain

Yet another austerity budget raises concerns about future growth

IN HAPPIER days before the euro crisis, one government in Lisbon rebranded the Algarve as the Allgarve, hoping to appeal to English-speaking tourists. Now a Portuguese wit suggests rebranding the whole country as Poortugal.

Amid furious protests and thundering editorials, such mordant humour was a restrained response to the draft 2013 budget that Vítor Gaspar, the finance minister, presented on October 15th. To meet the targets agreed to by the “troika” of the European Union, European Central Bank and IMF, he wants “enormous” tax increases, including the raising of average income-tax rates by as much as a third.

Seldom have protesters, economists and politicians been so united in describing the plans: “brutal”, “a crime against the middle class”, a “fiscal atomic bomb”. Few agree with Mr Gaspar’s claim that “this is the only possible budget” and that to question it is to risk being subjected to a “dictatorship of debt” with Portugal condemned to depend on its official creditors indefinitely.

Yet most voters would agree with Mr Gaspar that to default on the country’s debt, as the radical left advocates, would be “catastrophic”. Even so, recent protests have been swelled by tens of thousands of mainstream voters who believe that squeezing working families is not just unnecessarily painful but is also choking off growth.

The critics have latched on to the latest outlook from the IMF in which the fund argues that, in today’s economic climate, fiscal consolidation is having a bigger negative impact on growth than usual. The opposition Socialists believe this perfectly describes Portugal’s predicament. They want more time to meet budget targets, on top of an extra year granted last month. More worrying for Pedro Passos Coelho, the prime minister, is that the IMF line is echoed by President Aníbal Cavaco Silva, also from the centre-right, who has written that it is wrong to pursue deficit goals “at any cost”.

Another concern is the rift in the coalition over the budget. The conservative People’s Party, junior partner to Mr Passos Coelho’s Social Democrats, wants more public-spending cuts (new revenues account for 80% of the 2013 fiscal adjustment). The two parties must vote together to get the budget through parliament. But Mr Gaspar insists there is “no room for manoeuvre”.

Some say that his intransigence is more for form than for fiscal doctrine. Unlike Greece, Portugal has gained much kudos in Brussels and Berlin for being a model pupil for the euro zone. That could help it if and when the Spanish government requests a bail-out—and starts to argue with the troika about whether ever more fiscal austerity is really sensible.